VAT exemption from 2023

The change regarding the EU-level VAT exemption is expected to enter into force from 2025. The purpose of the amendment is to reduce the administrative burden on small and medium-sized enterprises, as well as to create a tax environment that promotes cross-border trade for this group of entrepreneurs and bridges the differences in the regulations of individual member states. The change will affect businesses conducting trade within the EU (e.g. selling on a webshop). The changes primarily affect the exemption value limit, and it is also important to note that the subject will be able to choose the exempt status in a Member State other than the one in which it is established. Sellers on digital platforms are also indirectly affected by the obligation to provide data on electronic platforms (based on the DAC7 EU Directive) introduced this year, because of which the tax authorities will be able to see their income.

Current regulation
Hungarian rules provide micro, small, and medium-sized enterprises with an annual income limit of HUF 12 million to choose a tax exemption. In this case generally, VAT does not have to be paid, but at the same time, the company will not be entitled to deduct VAT. Of course, there are exceptions to the main rule, because in certain cases (e.g. provision and use of cross-border services, product import, distance selling etc.) the VAT-exempt business is also subject to the general VAT rules.

According to Hungarian legislation, a company engaged in economic activity is obliged to register with the tax authorities as a taxable subject, however, it is entitled to VAT exemption only if it also announces its choice to the National Tax and Customs Administration (NTCA) beforehand. Several European Court of Justice rulings have recently confirmed that the Hungarian VAT act rules on VAT exemption are in line with the provisions of the European directives, so the NTCA can quite rightly establish a VAT deficiency and tax fines for companies operating irregularly (those who fail to register as a taxable person, or who register as a taxable person but fail to register for the VAT exempt status) – even if their income remains below the value limit of HUF 12 million. In these cases, retroactive choice of VAT exemption is not possible, so the tax authority will establish or estimate the tax liability in accordance with the law, and they will also have to count on increased default and tax fines if the NTCA can prove bad faith. The only exceptions to the strictness of the law are those cases when the subsequent amendment of the election does not affect the amount of the tax or tax base and the correction was made before the tax audit began (so-called correction request). In this case, the company basically operates with the intention of complying by the law, it “only” committed an administrative error.

Sellers on websites and mobile applications are affected by the obligation to provide data on digital platforms, which was also introduced in Hungary this year. According to the new obligation, the platforms must provide the tax authorities with data on sales of goods, personal services, real-estate, and transport vehicle rentals, so from now on the NTCA will have a better overview of these incomes as well.

Based on the current regulations, the subject exemption can only be applied to transactions completed in the country where the taxable person has an economic establishment. This means, on the one hand, that only domestic transactions are included in the value limit (e.g. cross-border webshop sales, electronic service provision typically not), and on the other hand, the exempt business must treat its international transactions in the same way as if it were taxed according to the general rules.

The new regulation
The choice of VAT exemption remains optional in the new regulations, but at the same time, unlike the current regulations, the VAT exemption will also be applicable in the Member State other than the economic establishment (e.g. a company with its registered office in Hungary, carrying out distance sales within the EU can register for VAT exempt status in Germany, if it has a customer base there).

According to the new rules, two types of value limits will have to be considered in the future: a member state limit and an EU limit.

The value of the Member State’s annual income limit without VAT can be a maximum of EUR 85,000, but of course individual Member States may apply any other value limit below the mentioned value limit – the exchange rate published by the European Central Bank on January 18. 2018, must be used for currency conversion. The national value limit only includes the value of transactions completed in the given member state, while the EU value limit includes all transactions completed within the Union. The new regulation allows the member states to establish different income thresholds for different sectors based on objective criteria.

In case of exceeding the value limit of the member state, the VAT exemption will not be eligible for the next calendar year, and it is left to the consideration of the member states that in such cases they can “prohibit” businesses from re-registering for VAT exempt status exemption for up to two years. However, in the case of inter-annual border crossing, the member states can apply a “tolerance zone”, which allows taxpayers not to fall out of the subject’s VAT-free status in the event of a minimum limit crossing (10-25%, but not exceeding EUR 100,000 annual sales revenue) in the given year, so they lose the favourable tax status “only” from the following year.

Another important change is that the subject’s tax-free status will be available in a Member State other than the one in which the business is established. A taxpayer established in the territory of the Community can choose a foreign subject exemption if he remains below both the EU limit and the given member state limit each year. The choice of foreign VAT exempt status will work in a one-stop system, so the related administrative obligations (e.g. provision of data on quarterly turnover) will have to be fulfilled to the NTCA.

The foreign VAT exemption will be a tax advantage for distance sellers on electronic platforms and cross-border service providers within the EU, as they will not have to pay VAT in the destination country. In the coming years, standardized electronic invoicing rules at the EU level, the obligation to provide data for international transactions, and the end of VAT registrations in the long term must also be expected, the latter of which will be replaced by mandatory international reverse taxation and single-window systems.

Related Posts